The ProShares Ultra VIX Short- Term Futures exchange-traded fund (UVXY) has seen a bigger increase in trading volume than any other ETF across the market, according to Bloomberg derivatives reporters Nikolaj Gammeltoft and Cecile Vannucci. The average daily trading volume has ballooned from about 4,000 shares at the end of 2011 to 6.5 million, they find. The product is benefiting from traders’ apparently still-burgeoning demand for fast-moving ways to bet on market volatility or hedge against it, even when market gyrations repeatedly failto occur. It’s also benefited from the woes of a competing product. More on that below.

UVXY gives leveraged exposure to an index of volatility futures. It’s important to note for performance reasons that that isn’t the same as exposure the CBOE Volatility Index, or VIX. The index driving UVXY is a leveraged version of what’s behind the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX), a heavily traded product giving exposure to a frequently rebalancing set of volatility futures that change hands on the Chicago Board Options Exchange’s futures market.

What’s especially stunning is the way trading has taken off over the last six weeks or so. Market volatility has been subdued of late. The same isn’t true of UVXY trading, whose typical summer reading of 2 million or so shares per day skyrocketed to the range of five, six and seven million in early September.

You might think this product’s rise lately would be connected to the decline of the VelocityShares Daily 2x VIX Short Term ETN (TVIX). Certainly over the long haul it looks like UVXY is supplanting TVIX as the preferred leveraged volatility trade. TVIX suffered damaging share-creation problems earlier this year, drawing regulators’ attention tothe oft-overlooked ETF and ETN share-creation process. Unlike peers, TVIX hasn’t announced a reverse split this time around. It traded at $1.30 on Friday morning, and will probably keep moving lower as time drags on. The jump in UVXY trading this fall didn’t correspond with an equal drop for TVIX, however.

Long-term performance doesn’t matter if you’re using the product as a quick hedge or bet on market volatility. It also doesn’t matter to a range of complex types of quantitative trading that deploy this fund. That’s why users don’t much care that UVXY is down 96% this year, according to FactSet Research Systems. The VIX index, which tracks Standard & Poor’s 500 stock index (SPY) options prices, is down 48%. (Note to beginners: You can’t actually buy the VIX, which is just a statistic. But you can trade futures and options tied to the measure, and the plain-vanilla options market — the one for stocks — is another place to look.)

Buy-and-hold investors shouldn’t have much use for this tool. The prospectus tells you as much if you bother to read it. As ProShares puts it bluntly on page 13, in bold-faced type: “[I]nvestors should not expect the VIX Funds to retain any appreciation in value over extended periods of time.”

Asset flows for VIX-futures products are pretty unique. As we reported a few weeks ago, the most popular volatility products have taken in more money this year along than they currently hold. It’s easy to see how that could happen. If a fund is down 90% for the year, it will have, by definition, burned through most of its assets. UVXY has enjoyed investor inflows of $706 million this year. Right now it holds just $190 million, according to XTF.com. But, again, if you’re making a short term bet, you may not mind spending the money, just like you put your entire expenditure on the line when you buy an option, or spend money on insurance.

By its own history, the most closely watched measure of market volatility looks downright placid. Investors who worry about the fiscal cliff in the U.S. or a replay of Europe’s debt woes may be tempted to buy some volatility-themed portfolio insurance in the market for exchange-traded notes, thinking that right now, those notes are cheap.

Investors who fixate on the CBOE Volatility Index should be comparing this index to the stock market’s actual volatility, in addition to its own history. The same is true for users of the complicated VIX-based exchange-traded funds and notes built to reflect VIX derivatives. The intuition is that investors need to look carefully at the premium they’re paying for volatility insurance versus what is actually happening day-to-day in the stock market.

Bill Luby, author of the indispensable VIX and More blog, ran the numbers recently. He found that the gap between the price of insurance as measured by VIX versus the market’s actual swings is at its widest since 1996. During 2012, the VIX has overestimated 10-day historical volatility in the SPX by 47%, Luby writes.

That’s like Geico charging you an auto premium as if you were half again as likely to crash your car this year than the historical numbers suggest.

You might object that history is just that — history. Market volatility has been known to make sudden and dramatic appearances in recent years, so history may not be a guide. But it turns out to be a pretty decent guide versus any other metric you could identify. “[I]t is more difficult than one might imagine to incorporate information about the future to come up with a better estimate of future volatility than what can be gleaned just by extrapolating from recent realized volatility,” writes Luby.

The upshot is a theme we cover on this blog regularly: VIX ETNs are a bazaar of arbitrage and fast-trading activity. More power to the quants and day traders who’ve done their homework. But the odds are long for investors who use these products as a buy-and-hold hedge.

On a price basis, VXX is down more than 75% this year, while UVXY and TVIX are down by 95%-96%.

A handful of other volatility-themed products have performed better due to their very different index construction.

The Barclays S&P 500 Dynamic Vector ETN (VQT), a complex mix of stocks and volatility futures that’s up a little more than 4% this year, has enjoyed $187 million in inflows, or more than half its $353 million in assets. The iPath S&P 500 Dynamic VIX ETN (XVZ), down 8.8% on the year, holds $318 million, more than half of which also showed up this year.

The VelocityShares Daily Inverse VIX ETN (XIV), a kind of backdoor bullish bet on the stock market that’s up 171% this year, has seen investors pull out $458 million this year, leaving it holding $275 million.

Correction 5:12 p.m.: This post initially said the products “burnt through more than twice as much money” as investors currently hold in them. The figures are $4.5 billion versus $1.9 billion. That’s once over and then some. Not “more than twice.”

USAA vice president of equity investments Wasif Latif, whose charges include the USAA Total Return Strategy Fund (USTRX), is a believer in “volatility as an asset class” — the idea that investors should view market gyrations as a trend to trade rather than something to fear.

That’s a step beyond simply buying a favored stock, ETF or bond at a discount during a market swoon. It means using exchange-traded tools that are built for use as portfolio insurance or as speculative vehicles. But it’s worth noting that Latif is not one to use the dozens of products whose name includes “volatility” or “VIX.”

“Volatility is exceptionally cheap right now,” Latif told Barrons.com this week during a visit to our offices. He says he’s a buyer at these levels, convinced that the market isn’t ready to drift into a quiet, if bullish, period like what was seen in the 1990s, a time of prolonged low volatility.

But Latif won’t use heavily traded products like the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX), or leveraged versions like the VelocityShares Daily 2x VIX Short Term ETN (TVIX) or ProShares Ultra VIX Short-Term Futures ETF(UVXY). Traders who use those products need “very high certainty that something is going to happen in the market now,” Latif observes. And they need very short time horizons.

But who really has that level of certainty? “When will volatility spike and markets tank? I couldn’t tell you that,” he says.

Latif instead prefers to use plain-vanilla put options on the S&P 500 or another widely owned stock index, such as the MSCI Emerging Markets Index. Doing things this way avoids basis risk, for one. “I want it on the same security,” he says.

Indeed, the VIX number shown hourly on CNBC is simply a calculation of S&P 500 index option prices.

If you feel compelled to “trade” volatility or view it as an asset class, there’s no harm in going the simple route, which means using options on the broad stock index or the SPDR S&P 500 ETF (SPY).

“Simple” in this case means avoiding the trap of using a product just because it appears to trade like a stock and has been effectively marketed as a volatility-trading tool.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.